Why is crypto crashing today (again)?

Important takeaways

• Bitcoin fell nearly 13% in the past week, though it recovered Monday’s lost value before midnight
• Ethereum briefly dipped below $1,300 on Monday before clawing back some losses to end up 4.5% over a 24-hour period
• Many experts claim global macroeconomic concerns fed into crypto’s recent crash
• Market advocates also believe that Ethereum’s recent “Merge” and the specter of crypto regulations affected prices

Several major cryptocurrencies suffered heavy losses early Monday as their market valuation plunged to nearly $900 billion.

Bitcoin plunged from around $19,450 to just over $18,400.

Ethereum smashed below $1300 and bounced around for hours.

Other big names like cardano, dogecoin and solana all lost around 5-7%, while shibu inu and ethereum classic gave up around 10%.

The newly minted ETHPoW coin fared the worst, shaking off almost half of its valuation in just hours.

By 11:00 PM EST, the worst of the day’s carnage had ceased. The global crypto market capitalization rose from around $914 billion to hover around $940 billion as market awareness increased.

Bitcoin recovered to around $19,460, minimizing its weekly decline to just 12.7% as its 24-hour gain topped 3.2%. Ethereum regrouped at $1,365, gaining 4.5% in the last 24 hours despite a 20% drop in the last 7 days. The rest of the market largely stabilized, although some volatility was present late in the evening.

What made Monday unusual is that the market lacked a unifying explanation for today’s devastation. It has investors wondering: why is crypto crashing today – again?

Why is crypto crashing today?

Experts largely believe that the answer for Monday’s cryptocurrency pop lies spread across 2022’s timeline.

Declining macroeconomic conditions – including reduced market support from the Fed, higher interest rates and the ongoing Russia-Ukraine conflict – have all played their part in this year’s volatility.

Repeated reports of stubborn CPI inflation data, including August’s, have panicked investors worried about fading purchasing power and looming recession. Many fear the Federal Open Market Committee will use August’s inflation and jobs data to justify a higher-than-expected rate hike this week.

Since January, risky assets such as stocks and cryptos have suffered, while the Nasdaq Composite remains entrenched in a bear market. Bitcoin and Ethereum have both plunged over 60% since January.

But the protracted and highly anticipated nature of these events doesn’t fully explain why crypto took a sudden dive without any new information.

Enter “The Merge”.

What is “The Merge”?

Ethereum’s blockchain merger, or simply “The Merge”, was a highly anticipated event in the crypto world. The merger moved Ethereum from an energy-intensive proof-of-work consensus mechanism to a more environmentally friendly proof-of-stake mechanism. The details are a little technical, so we’ll just look at the basics. (You can explore in more detail here.)

Before last week, Ethereum relied on a proof-of-work (PoW) consensus mechanism to verify transactions, mint coins and secure the network. PoW relies on a network of computers, or nodes, running to solve complex math problems. The first to cross the finish line adds a block to the blockchain and can receive a reward (usually crypto).

PoW has been scorned as wastefully energy-intensive, as only one node can actually secure the block. “The Merge” aimed to change that.

Moving to a new proof-of-stake (PoS) model, Ethereum now requires validators to stake (hold) their ether on the blockchain to process transactions. By cutting out unnecessary computing power, the new process can reduce Ethereum’s environmental impact by up to 99.99%.

From a technical perspective, the merger – which was completed last week – was a success hailed as progress in the crypto community.

But some blockchain participants (namely major miners) were less enthusiastic, as the PoS mechanism greatly reduces their profit potential. Several coins forked away from Ethereum or established elsewhere, leading to concerns that the crypto market was becoming more saturated.

These concerns may have contributed to last week’s crypto volatility, which then spilled over into Monday’s trading session. Ethereum prices also fell as traders “sold the news” surrounding The Merge, leading to increased trading and price volatility.

Regulation vee: a dirty word in a dirty (energy) room

But The Merge itself, while exciting and worth trading, may not explain Monday’s volatility. However, an unintended consequence of the completion may. To understand, we need to explore the dirtiest word in a crypto trader’s vocabulary: regulation.

Regulation after merger

Last week, Gary Gensler, chairman of the Securities and Exchange Commission (SEC), used Ethereum’s upgrade as evidence that cryptocurrencies pass the “Howey test.” As such, Gensler warned, cryptocurrencies qualify as securities that require government regulation — a dirty word to “true” crypto believers who believe blockchain’s decentralized technology should remain free from outside influence.

Let us explain.

The SEC uses the Howey test to determine whether an asset counts as a marketable security. Under this threshold, a security is any “investment of money in a joint venture with a reasonable expectation that profits will be derived from the efforts of others.”

Some have argued that crypto’s reliance on a network of privately operated data nodes qualifies as “other people’s efforts.” But according to Gensler, Ethereum’s move to PoS—which requires private investors to stake their own funds—solidifies the designation.

“From the coin’s perspective,” he said in a statement, “it’s another indication that under the Howey test, the investing public expects profits based on the efforts of others.”

Gensler also noted that he did not single out a specific currency, reiterating his belief that “the vast majority” of cryptocurrencies qualify as securities. Furthermore, as securities, “these transactions must be recorded or made pursuant to an available exemption.”

And, in a blow to major crypto exchanges, Gensler added that any crypto platform that offers betting services “looks very similar — with some changes in labeling — to lending.”

In other words: while crypto enthusiasts use big words and high-tech equipment, a security by any other name can be regulated just as sweetly. With the specter of potential regulation on the horizon – a big no-no for true crypto believers – some holders have already sold out, likely contributing to why crypto is crashing today.

Bitcoin’s brush with environmental regulation

But Ethereum is not the only coin facing government regulation.

Way back in March, President Joe Biden signed an executive order for the White House Office of Science and Technology to investigate the effects of digital assets. Of particular interest is bitcoin, which is estimated to consume 0.55% of the globe’s electricity production annually. (For reference, that’s roughly how much all of Sweden spends in a year.)

Fast forward to early September and the Office of Science and Technology has issued its assessment: get clean – or get out.

More specifically, the Office of Science and Technology stated that: “Electricity use from digital assets contributes to [greenhouse gas emissions], further pollution, noise and other local impacts…. The US government has a responsibility to ensure stability in the power grid, enable a clean energy future and protect local communities from pollution and climate change.”

To meet these goals, the office recommends creating clean energy performance standards for cryptomining to reduce ongoing pollution. However, the report notes, “should these measures prove ineffective in mitigating the impacts, they will [Biden] the administration should explore executive action, and Congress may consider legislation, to limit or eliminate the use of high-energy-intensive consensus mechanisms for mining cryptoassets.”

This report also echoes previous sentiments outside the EU, where the European Commission discussed banning bitcoin’s PoW mining mechanism based on its dirty environmental footprint.

In layman’s terms: For a society that despises regulation and government intervention, bitcoin is wading into it—and its price is suffering as a result.

Future restrictions on everyone of crypto – not just bitcoin

But again, that’s not all.

These latest findings and statements come amid a series of reports from the White House calling on regulators – particularly the SEC and the Commodity Futures Trading Commission (CFTC) – to regulate cryptos more strictly.

Even Treasury Secretary Janet Yellen has weighed in on the debate, noting in a press conference that “The reports clearly identify the real challenges and risks posed by digital assets used for financial services. If these risks are mitigated, digital assets and other new technologies can offer significant opportunities.”

Ms. Yellen also added that “Innovation is one of the hallmarks of a vibrant financial system and economy, but as we have painfully learned from history, innovation without adequate regulation can result in significant disruption and harm to the financial system and individuals.”

Together, these claims could add weight to the SEC’s arguments as it fights to regulate the broader crypto industry. And it is highly unlikely that these recent statements and events, along with The Merge, did not affect Monday’s crypto prices.

What crypto volatility means for investors

Experienced crypto investors now know that volatility is expected. Big drops are common, as both Bitcoin and Ethereum have halved their peak value more than once.

For those who plan to invest in crypto long-term, a buy-and-hold strategy may be the best option. But as a new, unregulated and wildly volatile asset, most experts recommend limiting your crypto exposure to 5% of your total portfolio. (Or no more than you’re comfortable losing in a downturn.)

Doing so ensures that you don’t have to eat huge losses when the market fluctuates and that you can “set and forget” your portfolio more comfortably. And for investors who see this latest decline as a potential buying opportunity, limiting future losses is almost always wise advice.

On the other hand, if you feel that crypto is too volatile for your taste, you may prefer more traditional assets. Alternatively, you may want to drastically limit your exposure while still putting in some money. For these investors, diversification with crypto-related stocks and funds may make more sense.

Above all: If you’re a nervous investor determined to hang on, keep your nose out of your profit page. Tracking your progress too closely makes it more likely that you will invest in emotion, rather than strategy and logic. Often it is better to let volatility take its course than to try to time the market or take your losses.

Why is crypto crashing today? In the end, it doesn’t matter

Crypto seems to be moving along all the reasons at one time – but ultimately today’s crash is likely to be a drop in the asset’s history. Still, we understand why crypto investors get nervous when the market moves without solid anchoring.

Fortunately, we can shake off some of those nerves with our AI-backed crypto kit. No, we cannot eliminate market volatility or guarantee gains. (And you shouldn’t listen to anyone who says that can.)

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